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Wednesday, 1 February 2023

Gold Portfolio Allocation Slows Down

Up- down, high- low, see- saw- Gold was totally on a contradictory move in the past few days. Well we can’t blame the precious metal for this confused behaviour. A host of global factors were responsible for creating this wave in the prices of precious metals. Firstly we saw gold touching several month highs over a softening dollar which was a result of lower than expected U.S data numbers. Gold prices recovered slightly from a two-day losing streak on Thursday amid growing uncertainty over a potential recession and the path of U.S. monetary policy. U.S. retail sales and industrial production data for December read weaker than expected on Wednesday, ramping up concerns over a broader economic slowdown in the country as it struggles with tight monetary policy and relatively high inflation. Then came in, one of the most influential factor – Interest rate hikes. The latest message delivered by Chairman Powell expressed that the Fed intended to slow the pace of interest-rate hikes in 2023. This message was reinforced by Patrick Harker- the president of the Philadelphia Federal Reserve. Reuters news reported that “he‘s ready for the U.S. central bank to move to a slower pace of interest rate rises amid some signs that hot inflation is cooling off”. Though gold prices dropped on Tuesday, gold stalled its ongoing corrective downside, staging a decent comeback on Wednesday. The US Dollar has reversed its early gains amid falling US Treasury bond yields, which has helped Gold price recover lost ground. Meanwhile, Gold price continued to benefit from increased bets of smaller US Federal Reserve (Fed) rate hikes, although the US Retail Sales and Producer Price Index (PPI) will help shed more light on the same. However later in the day , live gold price turned negative, erasing gains made on weak U.S. economic data yet staying above the $1,900 level, as key members of the Federal Reserve signaled their intent to keep pushing interest rates higher to combat inflation. The Federal Reserve raised its benchmark rate more aggressively last year than any other time since the 1980s. Beginning in March 2022 the Fed raised rates at every FOMC meeting with four consecutive jumbo 75-bps rate hikes. This took the Fed’s benchmark rate from 0-25 bps in February to 425-450 bps by the end of the year. The Federal Reserve is currently anticipating that they will raise rates until they reach their target of 5 ¼ to 5 ½% this year. Still, overnight comments from several Fed members, including Loretta Mester and James Bullard, called for more interest rate hikes, given that inflation is still well above the central bank’s annual 2% target. They also forecast that U.S. borrowing rates will likely peak around 5%, although most members supported a slower pace of hikes. "High interest rates often suppress the price of gold, as other investments become more attractive. However, central bank buying, particularly from developing countries turning away the dollar, has propped up the gold price." is what bullion dealers in India have to say. Now when we look at portfolio allocation, we really need to see the best performing assets Vis a Vis its counterparts. And for gold, the strongest contender is crypto. Gold and crypto currencies have sometimes been seen as competing for investor attention Of course, both crypto and gold can be a means of payment, a store of value and either is 'no-man's' liability. With the world becoming multi-polar, the latter point is important for central banks, especially in emerging markets. To that point, in the run-up to the war in Ukraine, Central Bank of Russia had reduced USD holdings while at the same time boosting exposure to gold. Nonetheless, gold has a solid and credible history and is way superior compared to others assets in its class. Precious metals, including gold, silver, platinum and palladium, have grown in prominence in recent years as viable investment alternatives to include in asset allocations. Asset allocation seeks to increase risk-adjusted returns through diversification, based on the principle that different assets perform differently under varying market and economic conditions. For several decades, investors have achieved this through traditional asset classes, such as stocks, bonds and cash. Though, currently, investment allocation in gold has halted for awhile, we believe that as things start to settle, and we start to see the outcome of gold price today rises, not only in the U.S. but globally we're going to start to see how gold will fit back into people's portfolio.

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